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Investment Overview for E-Trade (NASDAQ:ETFC)
Below are key drivers of E-Trade's value that present opportunities for upside or downside to the current Trefis price estimate for E-Trade:
Net Interest on Assets
- E-Trade's Interest Earning Assets: Loans, mortgage-backed securities and investment securities, primarily constitute E-Trade's interest earning assets. Worth at about $46 billion, these assets were at their peak in 2008. Following the financial crisis, assets fell to about $44 billion in 2009 and $41 billion in 2010. In 2011, assets increased to $42 billion, and the trend continued through 2012 as the company experienced organic growth in assets, ending the year with $43 billion. We currently forecast a steady growth in these assets through the Trefis forecast period, to reach $63 billion. However, should the growth be slower than expected, reaching only $50 billion, there is a potential downside of 10% to our price estimate.
- E-Trade's Net Interest Yield on Loans, Deposits & Securities : E-Trade's net interest yield has been around 3% recently, primarily influenced by the low interest rate environment prevalent in the U.S. The yield dropped from 2.98% in 2010 to 2.86% in 2011, and further to 2.53% in 2012. If interest rates do not improve soon enough, the yield may further fall to 2.34% by the end of the Trefis forecast period. This again represents a downside of 10% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for E-Trade at the top of the page.
E-Trade is a financial services company that provides online brokerage, and related products and services, primarily to individual retail investors, under the brand “E*TRADE Financial". E-Trade's primary focus is to profitably grow its online brokerage business, which includes active traders and long term investing customers.
E-Trade also provides investor-focused banking products, primarily sweep deposits and savings products to retail investors. It generates revenue by earning interest on loans and deposits in the brokerage accounts.
E-Trade's primary value comes from the net interest it earns on its assets.
Large interest-earning asset base
E-Trade's interest earning assets peaked at $56 billion in 2007, before the credit crisis began. In 2012, E-Trade had interest earning assets of about $44.3 billion and earned a spread of 2.39% on these assets, or about $1.08 billion in net interest income. We expect that assets and yields will remain somewhat depressed in the near term, due to macroeconomic uncertainty and the persistent low interest rate environment in the U.S. However, we forecast a long term improvement in yields and assets, as market conditions eventually recover.
More accounts and activity drive commissions
We estimate that E-Trade had about 2.9 million brokerage accounts in 2012 and the average account generated 12 trades annually from which E-Trade earned an average trading commission revenue of about $11.
Intense competition to pressure pricing
The online financial services market continues to evolve rapidly and we expect it to remain highly competitive. E-Trade's trading and investing segment competes with full commission brokerage firms, discount brokerage firms, online brokerage firms and market-making firms. Many online brokerages have cut their fees in order to attract new clients. Accordingly we expect E-Trade to have to lower their fees going forward, in order to remain competitive, which will put pressure on average revenue per trade.
Eventual market recovering to drive volumes
While market conditions remain uncertain, we expect a gradual recovery, which will result in greater investor risk appetite. This should lead more people to invest in the market and also drive increased trading activity from existing investors.
Long term investing customer accounts trade less
E-Trade's long term investing customer group is less active compared to its other customers, and represents opportunity for future growth of its trading and investing customer franchise. As E-Trade works on its strategy to increase the number of long term investing customer accounts, it will consequently lead to decreased average number of trades per account.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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